Latest news from international tax and transfer pricing
ATO continues its focus on international tax issues
The Australian Taxation Office (ATO) has issued three new Taxpayer Alerts (TA), continuing the trend of highlighting issues for multinational groups. These are:
- TA 2016/7, which identifies arrangements involving Australian income tax consolidated groups with subsidiaries that operate through offshore permanent establishments (PEs) that have entered into intra-group transactions. The ATO is concerned the consolidated group in Australia is not returning the right amount of taxable income. In particular, that the amount of taxable income returned does not reflect the economic substance and significance of the operations carried on in and between Australia and the offshore jurisdiction in a manner that is consistent with the arm's length principle.
- TA 2016/8, which discusses the ATO’s review of arrangements entered into in response to the Multinational Anti-Avoidance Law (MAAL). Further to this, the ATO is considering the Goods and Services Tax (GST) consequences of the arrangements involving the distribution of intangible products and services into Australia, as they are deemed to be inconsistent with the policy intent of both the MAAL and GST Act. Under this arrangement, it is purported that while an Australian entity contracts with Australian customers to avoid the application of the MAAL, no GST is payable on the supplies on the basis the supplies are not made through an enterprise carried on in the indirect tax zone. An addendum was also made to GST Ruling GSTR 2000/31 which indicates the Commissioner of Taxation’s view that any supply made by an entity in the course or furtherance of an enterprise it carries on through a PE in Australia is connected with Australia even if the supply can also be said to be connected with a place of business in another country.
- TA 2016/9, which identifies arrangements where taxpayers have excluded the value of a ‘debt interest’ that has been treated wholly or partly as equity for accounting purposes from their ‘debt capital’ for the purposes of the thin capitalisation regime. The ATO is concerned that this treatment results in inappropriate debt deduction claims. The ATO’s approach is that the sum of the accounting value of the equity component and the accounting value of the liability component of the debt interest on issue must be used in calculating the average value of debt capital. The Alert also states that the ATO will also generally take into account all relevant accounting entries, such as distributions to holders, such that the full face value of the debt interest will be used in the calculation of adjusted average debt. Furthermore, the Alert indicates that if the Commissioner determines that a taxpayer has undervalued its debt capital, the Commissioner may apply section 820-690 of the Income Tax Assessment Act 1997 (ITAA 1997) to substitute an appropriate value having regard to the accounting standards and the thin capitalisation regime, or may apply the general anti-avoidance provisions (Part IVA).
Additionally, the ATO has also released a draft Practical Compliance Guideline (PCG) (in the form of a discussion paper) in relation to transfer pricing issues related to the location and relocation of centralised operating models involving procurement, marketing, sales and distribution function (i.e. offshore hubs).
The purpose of this PCG is to establish a framework for taxpayers to:
- assess whether hub arrangements pose a transfer pricing risk and how that risk can be mitigated
- understand when the ATO may take a closer look at hub arrangements and the documentation and evidence the ATO expect to be prepared and readily available and
- understand disclosure obligations in relation to marketing hubs.
Comments on the draft PCG can be made until 30 September 2016. Refer to our feature article, Australia: offshore marketing hubs – ATO releases draft discussion paper, for further information.
The ATO also plans to issue guidance in relation to other hubs, as hubs remain a concern for ongoing ATO compliance activity.
Draft Taxation Determination limits foreign hybrid limited partnership election
On 10 August 2016, the ATO issued Draft Taxation Determination TD 2016/D2 (the Draft Determination) which sets out the Commissioner of Taxation’s preliminary view that a foreign resident cannot elect to treat their interest in a limited partnership as an interest in a foreign hybrid limited partnership under paragraph 830-10(2)(b) of the ITAA 1997. The following key points are made in the Draft Determination:
- Generally, limited partnerships are taxed as companies for Australian income tax purposes, subject to the application of the foreign hybrid rules in Division 830 of the ITAA 1997, where an entity that qualifies as a ‘foreign hybrid’ is treated as a partnership.
- When addressing the question of whether or not a foreign resident can elect to have their interest in a foreign investment fund (FIF) that is a corporate limited partnership to be an interest in a foreign hybrid limited partnership, the Explanation provided in the Draft Determination states that statutory interpretation principles require that the relevant sections be considered in context, having regard to the existing state of the law, the position under the former FIF rules, the amendments made to repeal the FIF rules and the mischief the statute was intended to remedy.
- The Explanation in the Draft Determination states that under the former FIF rules, the election available under section 485AA of the Income Tax Assessment Act 1936 (ITAA 1936) was limited to Part XI Australian residents who would otherwise be subject to the operation of the FIF rules. As a foreign resident was not subject to the FIF rules it could not make that election. The amendments to Division 830 of the ITAA 1997 made at the time the FIF rules were repealed did not broaden the scope of the election – the conditions required to make an election under paragraph 830-10(2)(b) of the ITAA 1997 are the same as those under former section 485AA of the ITAA 1936. Accordingly, an election for foreign hybrid treatment is only available to partners who are Australian residents.
- Appendix 2 of the Draft Determination contains an alternative view based on a literal approach to interpreting the relevant sections, noting that the plain and ordinary meaning of the text in subsections 830-10(2) and (4) of the ITAA 1997 does not contain any limitation that would preclude a foreign resident from electing to treat their interest in a limited partnership as an interest in a foreign hybrid. The only requirement in subsection 830-10(4) of the ITAA 1997 is that the partner has an ‘interest in a FIF’ as defined in former Part XI of the ITAA 1936, and there is no requirement that the holder is an Australian resident. As such, a foreign resident can have an interest in a FIF, even though it may not have been an interest to which Part XI applied. The Commissioner does not accept this alternative view.
Comments on the Draft Determination can be made until 9 September 2016.
OECD and BEPS developments
In the Communique from the G20 Finance Ministers and Central Bank Governors Meeting held in Chengdu, China on 23-24 July 2016, G20 Finance Ministers welcomed continued progress on the implementation of the Base Erosion and Profit Shifting (BEPS) package. They also endorsed proposals made by the Organisation for Economic Co-operation and Development (OECD), working with G20 members on objective criteria to identify non-cooperative jurisdictions with respect to tax transparency. The G20 has asked the OECD to report back on the progress made by jurisdictions on tax transparency, noting that ‘defensive measures’ will be considered against jurisdictions that have not sufficiently progressed towards a satisfactory level of implementation of the agreed international standards on tax transparency by the time of the July 2017 G20 Leaders Summit.
The OECD Secretary-General released a Report to the G20 Finance Ministers regarding the OECD/G20 BEPS Project; tax transparency; tax policy tools to support sustainable and inclusive growth; and tax and development. The Report also included an updated progress report by the Global Forum on Transparency and Exchange of Information to the G20.
The OECD has released the Tax Design for Inclusive Economic Growth paper for discussion and submits that Governments should use tax systems to drive an inclusive growth agenda. The OECD also released the Report by the Platform for Collaboration on Tax to the G20: Enhancing the Effectiveness of External Support in Building Tax Capacity in Developing Countries.
In addition, the OECD has undertaken further work to progress specific BEPS implementation plans, including:
- a discussion draft on interest deductions in banking and insurance sectors. The draft document provides a more detailed consideration of the BEPS risks posed by banks and insurance companies and those posed by entities in a group with a bank or insurance company, such as holding companies, group service companies and companies engaged in non-regulated financial or non-financial activities. Comments are due by 8 September 2016. For further information, see PwC Tax Policy Bulletin.
- a discussion draft on branch mismatch structures under Action 2 (neutralising the effects of hybrid mismatch arrangements) of the BEPS Action Plan. The discussion draft identifies five basic types of branch mismatch arrangements and sets out preliminary recommendations for domestic rules which would neutralise the resulting mismatch in tax outcomes. Comments can be made until 19 September 2016. For further information, see our feature article, OECD releases discussion draft on branch mismatch structures.
Refer to PwC Tax Insights from Transfer Pricing for further information on the recent OECD announcements which provide both an update and insight into the progress of anticipated areas of future work.
China’s State Administration of Taxation issues new transfer pricing compliance requirements
China’s State Administration of Taxation (SAT) on 29 June 2016 issued a public notice Regarding Refining the Reporting of Related-party transactions and the Administration of Transfer Pricing documentation (SAT Public Notice 42). The public notice provides new transfer pricing compliance requirements in China, including annual reporting forms for related party transactions, country-bycountry (CbC) reporting, and transfer pricing documentation, all of which are substantial changes to the existing rules. See PwC Tax Insights for further information.
Austria implements transfer pricing documentation and CbC reporting requirements
The Austrian Parliament has enacted legislation that introduces mandatory transfer pricing documentation requirements as defined in Action 13 of the OECD’s Action plan on BEPS. The legislation follows the three-tiered approach to transfer pricing documentation requiring multinational enterprises to prepare a Master File, a Local File, and a CbC Report. See PwC Tax Insights for further information.
Luxembourg proposes new corporate tax measures
On 26 July 2016, the Luxembourg Government introduced a bill with proposed tax measures for corporations to take effect from the 2017 tax year. The proposed changes, which include a reduced corporate income tax rate, are in line with the announcements made by the government earlier this year. See PwC Tax Insights for further information.